UK will not leave EU on March 29th

In the forthcoming "meaningful vote" due on January 15th members of parliament (MPs) are highly likely to reject the Brexit deal negotiated between the UK and the EU in November 2018. The UK prime minister, Theresa May, will then have three sitting days to present an alternative or revised Brexit plan to MPs.

We believe that whichever plan is pursued next, the government will be forced to request an extension of the Article 50 window for negotiating the UK's withdrawal, meaning that the UK will not leave the EU on March 29th 2019.

This forecast reflects our view that Mrs May and her government are not prepared to run down the Article 50 clock and leave the EU without a withdrawal agreement and transition arrangements in place ("no deal"). However, this remains a possible outcome later in 2019.

We believe that a "no-deal" Brexit is now the least likely scenario; the two most likely outcomes are an eventual approval of the Brexit deal or a second referendum.

Although a withdrawal agreement between the EU and the UK was finalised at an EU summit in November, MPs in the UK parliament are preparing to reject it on January 15th, throwing the Brexit process into uncertainty. MPs' main objection is that the agreement contains a "backstop" arrangement designed to avoid a hard border between Northern Ireland and the Republic of Ireland, which could keep the UK permanently in an EU customs territory if no equivalent UK‑EU trade deal is found. An amendment to the Brexit legislation on January 9th means that if the deal is rejected, then Mrs May will have only three sitting days to present an alternative or revised Brexit plan to MPs.

Little room for manoeuvre

With so little room for manoeuvre, we think that Mrs May will be forced to delay Brexit by requesting an extension of the Article 50 window for negotiating the UK's withdrawal, currently scheduled for March 29th. Extending Article 50 will provide the government with more time to pursue another plan; Mrs May is likely to resume her campaign to secure assurances from the EU on the terms of withdrawal and try to get another version of the deal approved by parliament in a subsequent vote. However, depending on the margin of defeat on January 15th, and the difficulty associated with getting the deal approved subsequently, this strategy could be abandoned, and the government may instead call a second referendum to break the political deadlock and provide it with popular legitimacy on how to proceed.

In our view, only in the unlikely event that parliament approves Mrs May's deal on January 15th, or if parliament allows the UK to leave the EU without a deal, will the UK leave the EU as currently scheduled on March 29th. As Mrs May's deal is on course to be rejected, this forecast therefore also reflects our view that the government is not prepared to leave the EU without a withdrawal agreement and transition arrangements in place ("no deal"), although this remains a possible Brexit outcome later in 2019.

The government will need to buy more time

For all other options, the government will need to buy more time, and we think that the EU will be willing to provide it to avoid a cliff-edge situation. This means that the EU will agree and make necessary provisions for the European Parliament elections taking place in May 2019. However, it is not clear at this stage what will happen to the former UK-held seats at the European Parliament that have been reallocated to other EU member states.

Delaying Brexit will not remove the downside risks associated with the process. With the time that it has bought, the government can pursue a new plan, but it will still be working towards a deadline to resolve the same deep political divisions over what Brexit should look like. It will also extend the period of Brexit-related uncertainty faced by UK businesses this year, with negative implications for our economic forecast.

With Brexit delayed, which plan is likely to prevail?

May's deal (40% probability)

After an initial defeat, we expect Mrs May to resume her campaign to get a version of the Brexit deal approved by parliament in a subsequent vote by pursuing further assurances from the EU on the terms of withdrawal and particularly on the terms of the Irish backstop arrangement. We assign a 40% probability to Mrs May getting a version of her deal ultimately approved by parliament.

Second referendum (30% probability)

The task of getting a version of Mrs May's deal approved will become more difficult if the margin of defeat in the upcoming meaningful vote is particularly large and/or the EU refuses to provide concessions that make the terms of the deal more palatable to UK MPs. We assign a 30% probability to a second referendum being called to break the political deadlock on how to proceed. The result of a second referendum will be strongly influenced by the questions that it contains and how the vote is structured. Nevertheless, such a referendum will keep the deal negotiated by Mrs May a live political option. It also makes possible "no Brexit" (for which the UK would revoke Article 50) and even "no deal" (once the extended Article 50 window closes).

Norway plus (15% probability)

An amendment to Brexit legislation has given MPs a say on the revised Brexit plan, and it is possible that cross-party support will build to keep the UK in the European Economic Area and a customs union—the "Norway plus" option. We assign only a 15% probability to this outcome, as MPs may fear being punished by voters for pursuing a Brexit path that retains free movement of labour—a central issue for "Leave" voters—and forces the UK to contribute to the EU budget and apply part of its policies without having a say on them.

General election (10% probability)

MPs from the opposition Labour Party may attempt to trigger a general election to break the political deadlock and give the party a chance to govern. However, the mechanisms for triggering an early election require a two-thirds majority in parliament or a motion of no confidence in the government to be passed. In our view, too many MPs would be worried about losing their seat in an election to support this option, the outcome of which would be highly uncertain.

No deal (5% probability)

The remaining possibility is that, having made further failed attempts to get a version of the Brexit deal approved by parliament, the government will face the Article 50 deadline once again. This option could also be voted for in the second referendum. We assign only a 5% probability to this outcome.